In 2018, Apple became the first publicly traded company to have a $1 trillion market cap. Since then, several more have joined it at that level and some of them have even exceeded the $2 trillion mark. Today, that exclusive club comprises Nvidia, Microsoft, and Apple -- all of which are actually above $3 trillion -- as well as Amazon and Alphabet.
Though payment network giant Visa (V 0.50%) hasn't even cracked the $1 trillion valuation ceiling yet -- its market cap is $680 billion as of July 11 -- I think it could join the $2 trillion club by 2035. The financial services powerhouse would need a compound annual growth rate of 11.3% during the next decade to hit that milestone. That would be no easy feat, but here's why the company could pull it off.
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A terrific business model
What happens when you swipe (or tap) a credit or debit card at a point-of-sale system? Transactions of this kind are typically processed in seconds, but what goes on behind the scenes is fairly complex. Visa is at the center of it all, helping merchants connect with issuing banks and, effectively, request the data that shows whether a consumer has the money or available credit to cover the transaction. If they do, the transaction is accepted; otherwise, it is rejected.
Every time a transaction is routed through its payment network, Visa pockets a small percentage of the total. According to some data, in the U.S. last year, there were an average of 1,781 credit card transactions per second, about 107,000 per minute, more than 6 million per hour, and almost 154 million per day. Of course, Visa isn't the only company in this industry, but it is the largest -- and the scale of credit and debit card usage in the U.S. should give investors an idea of the company's potential.
There are nearly 5 billion cards in circulation connected to the Visa network, and during the 12 months ended March 31, it supported about 316 billion transactions and $16.1 trillion in payment volume. The company's dominance in the payments segment translates into excellent financial results. Its revenue, earnings, and free cash flow have all grown at healthy clips during the past decade. Meanwhile, it has maintained gross margins of about 80% and net margins in the vicinity of 50%. For a company of its size, that's outstanding.
V Revenue (Annual) data by YCharts.
Visa can operate with such strong margins because it has already set up its nearly ubiquitous global payment network. Additional transactions don't meaningfully increase its cost of goods sold. In short, Visa has an excellent business that has performed exceptionally well in the past. That's no guarantee of future success, but there are good reasons to expect Visa to continue along the same path.
NYSE: V
Key Data Points
Powerful tailwinds
From its fiscal 2014 through its fiscal 2024, Visa's revenue grew at a compound annual rate of almost 11%, going from $12.7 billion to $35.9 billion. It's net income measured on a GAAP (generally accepted accounting principles) basis increased at a compound annual rate of 13.8%, going from $5.4 billion to $19.7 billion.
The long-term trend away from cash transactions and toward digital ones helped drive these results, but Visa still has ample room for growth. In the next decade, it could perform similarly well as it captures more of the significant share of payment volume that is still handled via cash and checks. The company's biggest competitor, Mastercard, notes that there are still about $12.5 trillion worth of cash and check transactions made annually worldwide.
That's before we point out that Visa will also benefit from the increasing use of e-commerce, an area where cash and checks are hardly viable options for most transactions. That should provide Visa with ample growth fuel through the next decade and beyond. True, competition from Mastercard is a risk, as are potential economic troubles that would lead to lower consumer spending activity. However, these challenges hardly change Visa's prospects.
The company can perform well despite stiff competition thanks to its powerful network effect. And while macroeconomic headwinds could sap Visa's financial results, its business is built to survive such conditions and continue thriving. Visa is well-positioned to deliver the long-term growth it needs during the next decade to become a $2 trillion company by 2035. Long-term investors should seriously consider purchasing the company's shares and holding them for the long haul.
